UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2015

 

Or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number: 333-164856

 

STRATEX OIL & GAS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Colorado		94-3364776
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

175 South Main Street, Suite 900 Salt Lake City, Utah		84111
(Address of principal executive offices)		(Zip Code)

 

(801) 519-8500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The issuer had 119,305,071 shares of common stock outstanding as of August 14, 2015.

 

 

 

 TABLE OF CONTENTS

 

			Page
PART I. FINANCIAL INFORMATION			3
Item 1.		Consolidated Financial Statements (Unaudited)	3
		Condensed Consolidated Balance Sheets (Unaudited) June 30, 2015 and December 31, 2014	3
		Condensed Consolidated Statements of Operations (Unaudited) For the Three Months Ended June 30, 2015 and 2014, and the Six Months Ended June 30, 2015 and 2014	4
		Condensed Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2015 and 2014	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.		Controls and Procedures	28
PART II. OTHER INFORMATION			29
Item 1.		Legal Proceedings	29
Item 1A.		Risk Factors	29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.		Exhibits	29
SIGNATURES			29

 

 

Item 1. Financial Statements.

 

Stratex Oil & Gas Holdings, Inc.

Condensed Consolidated Balance Sheets

 

		June 30, 2015				December 31, 2014
		(Unaudited)
Assets
Current Assets:
Cash		$	104,104			$	1,937,225
Accounts receivable			220,653				448,702
Prepaid expenses			902				39,593
Total Current Assets			325,659				2,425,520
Deposits			121,602				128,805
Debt issuance costs			1,157,651				1,887,378
Oil and gas property, plant and equipment:
Proven property - net			3,547,108				9,834,506
Unproven property			10,808,905				10,951,429
Support facilities and related well equipment - net			1,624,372				2,652,271
Vehicles, furniture and equipment - net			108,603				122,309
Total Assets		$	17,693,900			$	28,002,218
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities		$	3,653,237			$	3,609,890
Demand notes payable			452,575				322,575
Current maturities of notes payable - net of debt discount			520,210				573,094
Current maturities of convertible notes payable - net of debt discount			19,842,794				138,182
Capital lease obligations			-				88,000
Derivative liability - warrants			20,526				128,829
Total Current Liabilities			24,489,342				4,860,570
Long-term Liabilities:
Asset retirement obligations			290,770				639,349
Notes payable - net of debt discount			1,370,592				1,256,477
Convertible notes payable, net of debt discount			-				18,663,203
Total Long-Term Liabilities			1,661,362				20,559,029
Total Liabilities			26,150,704				25,419,599
Commitments and Contingencies
Stockholders' Equity:
Series A, convertible preferred stock,  $0.0001 par value; 400 shares authorized; 100 shares issued; 40 and 60 shares outstanding			-				-
Common stock, $0.01 par value; 750,000,000 shares authorized; and 119,305,071 and 116,904,004 shares issued and outstanding			1,193,049				1,169,038
Additional paid in capital			30,259,549				29,321,895
Accumulated deficit			(39,889,402	)			(27,888,314	)
Less: Treasury stock, 40 shares Series A, convertible preferred stock, at cost			(20,000	)			(20,000	)
Total Stockholders' Equity			(8,456,804	)			2,582,619
Total Liabilities and Stockholders' Equity		$	17,693,900			$	28,002,218

  

See accompanying notes to the condensed consolidated financial statements.

 

 

Stratex Oil & Gas Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

  

		For The Three Months Ended								For The Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2015				2014				2015				2014
Revenue		$	284,694			$	320,693			$	594,422			$	419,050
Operating Expenses:
Production expenses			206,560				140,791				518,087				181,730
Exploration expenses			392				-				392				-
Depletion, depreciation and amortization			112,867				24,188				291,519				41,707
Impairment of oil and gas assets			-				-				705,330				-
General and administrative			1,048,559				2,887,788				1,727,987				3,666,396
Loss on abandonment of oil and gas assets			-				318,800				331,405				318,800
Total Operating Expenses			1,368,378				3,371,567				3,574,720				4,208,633
Loss From Operations			(1,083,684	)			(3,050,874	)			(2,980,298	)			(3,789,583	)
Other Income and (Expense):
Interest income			-				8,071				-				8,071
Interest expense			(1,664,562	)			(1,762,649	)			(3,305,068	)			(2,087,675	)
Change in fair value - derivative liabilities			5,058				17,322				108,303				(72,094	)
Warrant amendment expense			-				-				-				(14,755	)
(Loss) gain on sale of oil and gas interests			(5,730,240	)			-				(5,730,240	)			450,000
Gain (loss) on settlement of liabilities			-				84,600				(92,077	)			83,600
Loss on extinguishment of debt			(1,708	)			-				(1,708	)			-
Other income			-				82				-				39,257
Total Other Income and (Expense)			(7,391,452	)			(1,652,574	)			(9,020,790	)			(1,593,596	)
Net Loss		$	(8,475,136	)		$	(4,703,448	)		$	(12,001,088	)		$	(5,383,179	)
Net Loss Per Common Share - Basic and Diluted		$	(0.07	)		$	(0.10	)		$	(0.10	)		$	(0.11	)
Weighted Average Number of Common Shares Outstanding - Basic and Diluted			119,240,396				48,612,651				118,365,695				47,953,674

 

 

See accompanying notes to the condensed consolidated financial statements.

 

  

Stratex Oil & Gas Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For The Six Months Ended
		June 30,				June 30
		2015				2014
Cash Flows From Operating Activities:
Net loss		$	(12,001,088	)		$	(5,383,179	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depletion, depreciation and amortization			291,520				7,707
Bad Debt			—				5,808
Stock based compensation			544,832				1,793,412
Warrant amendment expense			—				14,755
Amortization of debt issue costs			737,727				242,233
Accretion of debt discount			1,144,522				1,319,595
Impairment of oil and gas assets			705,330				318,800
Loss on abandonment of oil and gas assets			331,405
Loss on settlement of liabilities			92,077				(83,600	)
Income from forgiveness of debt			—				—
Loss, gain on sale of oil and gas interests			5,945,088				(450,000	)
Change in fair value of derivative liabilities			(108,303	)			72,094
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable			228,049				(125,888	)
Prepaid expenses			38,691				(39,235	)
Deposits			7,203				(25,000	)
Increase (decrease) in:
Accounts payable and current liabilities			77,802				776,164
Net Cash Provided By (Used In) Operating Activities			(1,965,146	)			(1564,405	)
Cash Flows From Investing Activities:
Purchase of oil and gas properties			(328,660	)			(3,660,108	)
Proceeds from sale of oil and gas interests			360,000				450,000
Proceeds from sale of oil and gas properties			—				(21,000	)
Purchase of furniture and equipment			24,077				(5,700	)
Increase in other receivables			—				(244,282	)
Increase on notes receivable			—				(1,391,938	)
Net Cash Provided By (Used In) Investing Activities			55,417				(4,873,028	)
Cash Flows From Financing Activities:
Proceeds from notes payable			—				400,000
Repayments on notes payable			(342,798	)			(97,510	)
Proceeds from convertible notes payable			430,916				13,020,510
Repayments on capital leases			(3,510	)			—
Debt issuance costs paid in cash			(8,000	)			(1,072,720	)
Net Cash Provided By (Used In) Financing Activities			76,608				12,250,280
Net change  in cash			(1,833,121	)			5,812,847
Cash at beginning of period			1,937,225				609,061
Cash at end of period		$	104,104			$	6,421,908
Supplemental disclosures of cash flow information:
Cash paid for interest		$	1,092,876			$	206,767
Cash paid for taxes		$	—			$	—
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock to settle liabilities		$	283,500			$	196,200
Original issue discount on notes payable		$	—			$	160,000
Original issue discount on convertible notes payable		$	—			$	3,944,927
Debt issuance costs paid in the form of warrants		$	—			$	585,359
Debt issuance costs accrued		$	—			$	335,226
Increase in asset retirement obligation		$	18,771			$	157
Vehicles purchased through issuance of notes payable		$	—			$	28,510
Capitalized oil and gas properties included in accounts payable		$	224,044				—

   

See accompanying notes to the condensed consolidated financial statements.

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1 Nature of Operations and Basis of Presentation:

 

Nature of Operations

 

Stratex Oil & Gas Holdings, Inc. (“we or the “Company”) was incorporated on August 15, 2003 as Poway Muffler and Brake Inc. in California to enter the muffler and brake business. On December 15, 2008, a merger was effected with Ross Investments Inc., a Colorado shell corporation. Ross Investments was the acquirer and the surviving corporation. Ross Investments Inc. then changed its name to Poway Muffler and Brake, Inc. On May 25, 2012, we filed an Amendment to our Certificate of Incorporation by which we changed our name from Poway Muffler and Brake, Inc., a Colorado corporation, to Stratex Oil & Gas Holdings, Inc., with the Secretary of the State of Colorado.

 

On July 6, 2012, Stratex Acquisition Corp., a wholly-owned subsidiary of Stratex Oil & Gas Holdings, Inc. merged with and into Stratex Oil & Gas, Inc., a Delaware corporation (“Stratex”) (“SOG”). Stratex was the surviving corporation of that Merger. As a result of the merger, we acquired the business of Stratex, and continued the business operations of Stratex as a wholly-owned subsidiary.

 

On December 1, 2014, pursuant to the terms and condition of the Agreement and Plan of Merger dated May 6, 2014 by and among Stratex Oil & Gas Holdings, Inc. (the “Company”), Richfield Acquisition Corp. (“Merger Sub”), and Richfield Oil & Gas Company (“Richfield”), as amended by Amendment No. 1 to Agreement and Plan and Merger dated July 17, 2014 (the Agreement and Plan of Merger, as so amended, the “Merger Agreement”), Merger Sub merged with and into Richfield, with Richfield continuing as the surviving corporation and as a wholly owned subsidiary of Stratex (the “Richfield Merger”).

 

The Company is engaged in the sale of oil and gas and the exploration for and development of oil and gas reserves in Texas, Kansas, North Dakota, Montana, Colorado and Utah.

 

Basis of Presentation- Unaudited Interim Financial Information

 

The accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to fairly present the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2014 and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on April 17, 2015.

 

Note 2 Summary of Significant Accounting Policies:

 

Principles of Consolidation and Presentation

 

The accompanying condensed consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates and assumptions impact, among others, the following: allowance for bad debt, inventory obsolescence, the fair value of share-based payments, fair value of derivative liabilities, estimates of the probability and potential magnitude of contingent liabilities and the valuation allowance for deferred tax assets due to continuing operating losses.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from our estimates.

 

Risks and Uncertainties

 

The Company operates in an industry that is subject to intense competition. The Company's operations are subject to significant risk and uncertainties including financial and operational risks including the potential risk of business failure.

 

The Company’s future success depends largely on its ability to find and develop or acquire additional oil and gas reserves that are economically recoverable. Unless the Company replaces the reserves produced through successful development, exploration or acquisition activities, proved reserves will decline over time. Recovery of any additional reserves will require significant capital expenditures and successful drilling operations. The Company may not be able to successfully find and produce reserves economically in the future. In addition, the Company may not be able to acquire proved reserves at acceptable costs.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2015 and December 31, 2014.

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable consist primarily of oil and gas receivables, net of a valuation allowance for doubtful accounts. As of June 30, 2015 and December 31, 2014, the allowance for doubtful accounts was $0, respectively.

 

Oil and Gas Properties, Successful Efforts Method

 

The Company accounts for oil and gas properties by the successful efforts method. Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed as incurred. The Company evaluates its proved oil and gas properties for impairment on a field-by-field basis whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. The Company follows FASB ASC 360 - Property, Plant, and Equipment, for these evaluations. Unamortized capital costs are reduced to fair value if the undiscounted future net cash flows from our interest in the property’s estimated proved reserves are less than the asset’s net book value. During the six months ended June 30, 2015, the Company recorded impairments on oil and gas assets of $705,330 and a loss on abandonment of oil and gas assets of $331,405. There were impairments on oil and gas assets of $318,800 and no loss on abandonments for the six months ended June 30, 2014.

 

The costs of development wells are capitalized whether productive or non-productive. Leasehold acquisition costs are capitalized when incurred. If proved reserves are found on an unproved property, leasehold cost is transferred to proved properties. Exploration dry holes are charged to expense when it is determined that no commercial reserves exist. Other exploration costs, including personnel costs, geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense when incurred. The costs of acquiring or constructing support equipment and facilities used in oil and natural gas producing activities are capitalized. Production costs are charged to expense as incurred and are those costs incurred to operate and maintain the Company’s wells and related equipment and facilities.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Depletion of producing oil and gas properties is recorded based on units of production. Acquisition costs of proved properties are depleted on the basis of all proved reserves, developed and undeveloped, and capitalized development costs (wells and related equipment and facilities) are depleted on the basis of proved developed reserves. As more fully described below, proved reserves are estimated by the Company’s independent petroleum engineer and are subject to future revisions based on availability of additional information. Asset retirement costs are recognized when the asset is placed in service, and are depleted over proved reserves using the units of production method.

 

Oil and gas properties are reviewed for impairment when facts and circumstances indicate that their carrying value may not be recoverable. The Company compares net capitalized costs of proved oil and gas properties to estimated undiscounted future net cash flows using management’s expectations of future oil and natural gas prices. These future price scenarios reflect the Company’s estimation of future price volatility. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, using estimated discounted future net cash flows based on management’s expectations of future oil and natural gas prices.

 

Unproven properties that are individually significant are assessed for impairment and if considered impaired are charged to expense when such impairment is deemed to have occurred. We perform periodic assessment of individually significant unproved crude oil and gas properties for impairment on a quarterly basis and we would recognize a loss at the time if there was an impairment by providing an impairment allowance. In determining whether a significant unproved property is impaired we consider numerous factors including, but not limited to, current exploration plans, favorable or unfavorable exploratory activity on adjacent leaseholds, our management and geologists’ evaluation of the lease, and the remaining months in the lease term. As of June 30, 2015 the company recorded and $66,177 expense for leases that had expired. There were no additional impairment allowances for expiring leases required as of June 30, 2015.

 

The sale of a partial interest in a proved oil and gas property is accounted for as normal retirement and no gain or loss is recognized as long as this treatment does not significantly affect the units-of-production depletion rate. If the units-of-production rate is significantly affected, then the sale shall be accounted for as the sale of an asset, and a gain or loss shall be recognized. The unamortized cost of the property or group of properties shall be apportioned to the interest sold and the interest retained on the basis of the fair values of those interests. A gain or loss is recognized for all other sales of producing properties and is included in the results of operations. The sale of a partial interest in an unproved property is accounted for as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained. A gain on the sale is recognized to the extent the sales price exceeds the carrying amount of the unproved property. A gain or loss is recognized for all other sales of nonproducing properties and is included in the results of operations.

 

Support Facilities and Equipment

 

Support facilities and equipment include property and equipment that are not oil and gas properties and are recorded at cost and depreciated using the straight-line method over their estimated useful lives of five to ten years. Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Long-lived assets, other than oil and gas properties, are evaluated for impairment to determine if current circumstances and market conditions indicate the carrying amount may not be recoverable. Our support facilities and equipment are generally located in proximity to certain of our principal fields.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Asset Retirement Obligations

 

The Company follows the provisions of the FASB ASC 410 - Asset Retirement and Environmental Obligations. The fair value of an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. As of June 30, 2015 and December 31, 2014, the Company’s obligations were $290,770 and $639,349, respectively. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. The Company’s asset retirement obligations relate to the abandonment of oil and gas producing facilities. The amounts recognized are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate. Accretion of asset retirement costs for the six months ended June 30, 2015 and 2014 were $16,195 and $0, respectively.

 

Debt Issue Costs and Debt Discount

 

The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized over the life of the debt to interest expense. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

 

Original Issue Discount

 

For certain debt issued, the Company provided the debt holder with an original issue discount. The original issue discount was equal to simple interest at 10% - 20% of the proceeds raised. The original issue discount was recorded to debt discount reducing the face amount of the note and is being amortized to interest expense over the maturity period of the debt. For certain debt the original issue discount exceeded face value bringing the carrying value to $0 and the remainder charged to interest expense.

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF the relative fair value of the BCF would be recorded as a debt discount against the face amount of the respective debt instrument. The debt discount attributable to the BCF is amortized over the period from issuance to the date that the debt becomes convertible. If the debt is immediately convertible, the discount is amortized to interest expense in full immediately.

 

Derivative Financial Instruments

 

Fair value accounting requires bifurcation of embedded derivative instruments such as ratchet provisions or conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company utilized an option pricing model. In assessing the Company’s convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

 

Once determined, the derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the option pricing model.

 

Revenue Recognition

 

Revenues from the sale of oil and natural gas are recognized when the product is delivered at a fixed or determinable price, title has transferred, and collectability is reasonably assured and evidenced by a contract. The Company follows the “sales method” of accounting for oil and natural gas revenue, so it recognizes revenue on all natural gas or crude oil sold to purchasers, regardless of whether the sales are proportionate to its ownership in the property. A receivable or liability is recognized only to the extent that the Company has an imbalance on a specific property greater than its share of the expected remaining proved reserves.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Share-Based Payments

 

Generally, all forms of share-based payments, including stock option grants, warrants, restricted stock grants and stock appreciation rights are measured at their fair value utilizing an option pricing model on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expenses resulting from share-based payments are recorded in cost of goods sold or general and administrative expense in the statement of operations, depending on the nature of the services provided.

 

Income Taxes

 

The Company is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.

 

The Company follows ASC 740 “Accounting for Uncertainty in Income Taxes” which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its consolidated financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. After review of the Company’s tax positions, no liabilities were recorded for unrecognized tax benefits as of June 30, 2014.

 

Earnings Per Share

 

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss), adjusted for changes in income or loss that resulted from the assumed conversion of convertible shares, by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.

 

The Company had the following potential common stock equivalents at June 30, 2015:

 

Convertible debt – face amount of $21,650,673, conversion price of $0.10 - $2.50			74,611,555
Common stock options, exercise price of $0.08 - $0.30			-
Common stock warrants, exercise price of $0.15 - $5.00			-
Total common stock equivalents			74,611,555

 

The Company had the following potential common stock equivalents at June 30, 2014:

 

Convertible debt – face amount of $120,000, conversion price of $0.70			171,429
Convertible debt – face amount of $13,020,510, conversion price of $0.30			43,401,700
Common stock options, exercise price of $0.08 - $0.50			9,225,000
Common stock warrants, exercise price of $0.15 - $0.85			21,581,768
Common stock to be issued			2,500,000
Total common stock equivalents			76,879,897

 

Since the Company reflected a net loss during the six months ended June 30, 2015 and 2014, the effect of considering any common stock equivalents, would have been anti-dilutive. A separate computation of diluted earnings (loss) per share is not presented.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Fair Value of Financial Instruments

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk inherent in the inputs to the valuation technique. The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

The three levels of the fair value hierarchy are as follows:

 

Level 1		Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2		Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3		Pricing inputs that are generally unobservable inputs and not corroborated by market data.

  

Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, inventory, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their fair values because of the short maturity of these instruments.

 

The Company’s Level 3 financial liabilities consist of the derivative warrants issued with the 2011 notes payables for which there is no current market for this security such that the determination of fair value requires significant judgment or estimation. The Company valued the reset adjustments in the warrant on subsequent potential equity offerings using an option pricing model, for which management understands the methodologies. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk-free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative warrant liability and derivative feature of convertible notes at every reporting period and recognizes gains or losses in the statements of operations attributable to the change in the fair value of the derivatives.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Financial instruments measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:

 

June 30, 2015		Fair Value Measurement Using
		Level 1				Level 2				Level 3				Total
Derivative warrant liabilities		$	-			$	-			$	20,526			$	20,526

 

December 31, 2014		Fair Value Measurement Using
		Level 1				Level 2				Level 3				Total
Derivative warrant liabilities		$	-			$	-			$	128,829			$	128,829

 

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period December 31, 2014 to June 30, 2015:

 

		Fair Value Measurement Using  Level 3 Inputs
		Derivative Liabilities				Total
Balance, December 31, 2014		$	128,829			$	128,829
Purchases, issuances and settlements
Total gains or losses (realized/unrealized) included in net loss			(108,303	)			(108,303	)
Transfers in and/or out of Level 3
Balance, June 30, 2015		$	20,526			$	20,526

 

Fair Value of Financial Assets and Liabilities Measured on a Non-Recurring Basis

 

For periods in which impairment charges have been incurred, the Company is required to write down the value of the impaired asset to its fair value. The impairment charges were recorded during the six months ended June 30, 2015 and 2014 were $0 and $0 respectively.

 

Jumpstart Our Business Startups Act (“JOBS Act”), adopted January 3, 2012

 

We qualify as an “emerging growth company,” as defined in Section 2(a) of the Securities Act as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are permitted to rely on exemptions from various reporting requirements including, but not limited to, the requirement to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act of 2002, and the requirement to submit certain executive compensation matters to shareholder advisory votes such as “say on pay” and “say on frequency.”

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an emerging growth company up to the fifth anniversary of our first registered sale of common equity securities, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.

 

In May 2014, the Financial Accounting Standards Board issued accounting guidance on revenue recognition. The amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. This guidance will be effective for fiscal 2017 and will be required to be applied retrospectively. We are currently assessing the impact that this guidance will have on our financial statements at this time.

 

In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15. This standard provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.

 

In April 2015, the Financial Accounting Standards Board issued ASU No. 2015-03. This standard provides guidance on the balance sheet presentation for debt issuance costs and debt discounts and debt premiums. To simplify the presentation of debt issuance costs, this standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This ASU is effective for fiscal years beginning after December 15, 2015. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.

 

Note 3 Going Concern:

 

The Company’s condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations causing negative working capital, in that current liabilities exceed current assets, and the Company has negative operating cash flows, which raise substantial doubt about the Company’s ability to continue as a going concern. As reflected in the accompanying condensed consolidated financial statements, the Company has a net loss of $12,001,088 and net cash used in operations of $1,929,155 for the six months ended June 30, 2015 and has a working capital deficit of $24,163,683 at June 30, 2015.

 

The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. 

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

The Company will require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. These uncertainties create substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Note 4 Oil and Gas Assets:

 

The following table summarizes the Company’s oil and gas assets, net:

 

Balance – January 1, 2014		$	2,276,552
Additions			23,377,139
Depletion			(163,095	)
Asset retirement obligations			36,238
Impairment			(3,697,924	)
Abandonments			(1,042,975	)
Dispositions			-
Balance – December 31, 2014		$	20,785,935
Additions			336,160
Depletion			(107,284	)
Asset retirement obligations			18,771
Impairment
Dispositions			(6,677,569	)
Balance – June 30, 2015		$	14,356,013

   

The Company owns support facilities and equipment which serve its oil and gas production activities. The following table summarizes the properties and equipment, net:

 

Balance – January 1, 2014		$	138,081
Additions			2,578,822
Depreciation			(64,193	)
Dispositions			(439	)
Balance – December 31, 2014		$	2,652,271
Additions			9,967
Depreciation			(152,387	)
Impairment			-
Dispositions			(885,479	)
Balance – June 30, 2015		$	1,624,372

   

On March 31, 2015 we entered into a Settlement Agreement whereby we agreed to transfer oil & gas leases totaling 2,629 acres located in Zavala County, Texas. The Company also transferred interest in well equipment located on the leases. The Company recognized a loss on the abandonment in the amount of $265,228.

 

In May, 2015, the Company reached agreements to sell its oil and gas leases and equipment located in Russell County, Kansas, to three different independent oil producers for a combined purchase price of $360,000. The Company deemed these properties uneconomic at current oil prices. The Russell County Properties sold by the Company are located in two separate projects:

 

On June 9, 2015, the Company received $285,000 for two initial closings. The remaining $75,000 of the purchase price will be released to the Company, or paid to third party vendors for the Company’s benefit, at the final closing scheduled for July 7, 2015. The Company also transferred interest in well equipment located on the leases. The Company recognized a net loss on the sale in the amount of $5,730,240.

 

For the six months ended June 30, 2015 and 2014, the Company recognized $107,284 and $17,519, respectively in depletion expense.

 

  

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 5 Acquisition of Richfield Oil & Gas Company:

 

On December 1, 2014, the Company acquired Richfield Oil & Gas Company (Richfield) by merging a wholly owned subsidiary of the Company with and into Richfield, with Richfield continuing as the surviving corporation and wholly owned subsidiary of the Company. Richfield is involved in the exploration and production of crude oil and natural gas. Richfield’s asset base, technical capabilities and operating expertise, together with the Company’s project management, operational skills and financial capacity, should enable effective development of oil and gas reserves. At December 1, 2014, each share of Richfield common stock was exchanged for one share of common stock of the Company and each outstanding warrant to purchase Richfield common stock was exchanged for one warrant to purchase a share of the Company’s common stock.

 

The components of the consideration transferred follow:
Consideration attributable to stock issued (1)		$	8,183,220
Consideration attributable to exchanged warrants (2)			422,067
Consideration attributable to settlement of accounts and notes receivable (3)			4,645,463
Total consideration transferred		$	13,250,750

 

(1)	The fair value of the Company’s common stock on the acquisition date was $0.135 per share based on the closing value on the NASDAQ OTC. The Company issued 60,616,448 shares of stock for the acquisition of Richfield.

  

(2)	The fair value of warrants issued by the Company on the acquisition to former warrant holders of Richfield.

 

(3)	The fair value of a note receivable and accounts receivables to the Company from Richfield that was settled upon the acquisition.

 

The following table summarizes the assets acquired and liabilities assumed as of the acquisition date. The Company is in the process of obtaining additional valuation evidence, including appraisals and other market transactions, as it relates to certain oil and gas properties and other long-lived assets. Therefore, the provisional measurements for these amounts are subject to change.

 

Cash and cash equivalents		$	6,011
Accounts receivable			188,887
Other current assets			140,439
Proven oil and gas properties (1)			8,145,486
Unproven oil and gas properties (2)			9,930,578
Well equipment			2,072,166
Furniture and equipment			38,205
Goodwill (3)			32,787
Total assets acquired			20,554,559
Accounts payable and accrued liabilities			2,500,473
Notes and loans payable (4)			4,114,183
Asset retirement obligations			601,153
Capital lease obligations			88,000
Total liabilities assumed			7,303,809
Net assets acquired		$	13,250,750

 

(1)

Proven oil and gas properties were measured primarily using an income approach. The fair value measurements of the oil and gas assets were based, in part, on significant inputs not observable in the market and thus represent a Level 3 measurement. The significant inputs included Richfield resources, assumed future production profiles, commodity prices (mainly based on observable market inputs), discount rate of 15.0 percent, risk adjustments of classes of reserves between 10.0% and 100.0% and assumptions on the timing and amount of future development and operating costs.

  

(2)

Unproven oil and gas properties were measured primarily using a market approach with internal management inputs based, in part, on significant inputs not observable in the market and thus represent a Level 3 measurement. The significant inputs include estimated price per acre, potential future production and assumptions on the timing and amount of future development and operating costs.

  

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

(3)

Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not amortized and is not deductible for tax purposes.

 

(4)	Notes and loans payable and capital lease obligations were recognized mainly at market rates at closing (Level 1).

 

Note 6 Vehicles, Furniture and Equipment:

 

The following table summarizes vehicles, furniture, and equipment:

 

Balance – January 1, 2014		$	2,380
Additions			133,792
Depreciation			(13,863	)
Impairment			-
Balance – December 31, 2014		$	122,309
Additions			1,947
Depreciation			(15,653	)
Dispositions			-
Balance – June 30, 2015		$	108,603

  

During three months ended June 30, 2015 and 2014, the Company recorded $6,228 and $2,034, respectively to depreciation expense.

 

Note 7 Demand Notes Payable:

 

As of June 30, 2105, three (3) convertible notes for an aggregate principal amount of $322,575 had become due and were in default. These notes were reclassified and are recorded as due on demand. The notes bear interest at rates between 10.0% to 12.0% and are convertible into shares of common stock at conversion rates between $0.60 to $2.50 per share.

 

As of June 30, 2105, three (3) notes payable for an aggregate principal amount of $130,000 had become due and were in default. These notes were reclassified and are recorded as due on demand. The notes bear interest at 12.0%.

 

Note 8 Notes Payable:

 

A)	Promissory Note

 

On May 20, 2013, the Company issued a promissory note with principal of $80,000 for proceeds of $80,000. The note bears interest at 12% per annum with interest only payments for the first 24 months. The note matures on May 19, 2015. In addition, the Company issued the note holder a five (5) year common stock purchase warrant exercisable for up to 100,000 shares of common stock at $0.85 per share. The issuance of the warrants was recorded as a debt discount up to the face amount of the note. The amount in excess of the face amount of the note was recorded to interest expense on the date of issuance. The note is secured by certain oil and gas assets of the Company.

 

B)	Promissory Note

 

On May 20, 2013, the Company issued a promissory note with principal of $25,000 for proceeds of $25,000. The note bears interest at 12% per annum with interest only payments for the first 24 months. The note matures on May 19, 2015. In addition, the Company issued the note holder a five (5) year common stock purchase warrant exercisable for up to 31,250 shares of common stock at $0.85 per share. The issuance of the warrants was recorded as a debt discount up to the face amount of the note. The amount in excess of the face amount of the note was recorded to interest expense on the date of issuance. The note is secured by certain oil and gas assets of the Company.

 

C)	Promissory Note

 

On October 1, 2013, the Company issued a promissory note with principal of $500,000 for proceeds of $500,000. The note bears interest at 12% per annum with interest only payments for the first 36 months. The note matures on September 30, 2016. In addition, the Company issued the purchaser 1,000,000 shares of common stock of the Company. The issuance of the shares was recorded as a debt discount equal to the market value of shares issued at issuance date.

 

D)	Promissory Note

 

On December 5, 2013, the Company issued a promissory note with principal of $500,000 for proceeds of $500,000. The note bears interest at 12% per annum with interest only payments for the first 36 months. The note matures on December 4, 2016. In addition, the Company issued the purchaser 1,000,000 shares of common stock of the Company. The issuance of the shares was recorded as a debt discount equal to the market value of shares issued at issuance date.

 

  

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

E)	Promissory Note

 

On December 12, 2013, the Company issued a promissory note with principal of $25,000 for proceeds of $25,000. The note bears interest at 12% per annum and with interest only payments for the first 36 months. The note matures on December 11, 2016. In addition, the Company issued the purchaser 50,000 shares of common stock of the Company. The issuance of the shares was recorded as a debt discount equal to the market value of shares issued at issuance date.

 

F)	Promissory Note

 

On January 27, 2014, the Company issued a promissory note with principal of $400,000 for proceeds of $400,000. The note bears interest at 12% per annum and with interest only payments for the first 36 months. The note matures on January 27, 2017. In addition, the Company issued the purchaser 800,000 shares of common stock of the Company. The issuance of the shares was recorded as a debt discount equal to the market value of shares issued at issuance date.

 

G)	Promissory Note

 

On February 14, 2014 and September 23, 2014, the Company issued promissory notes in the principal amount of $28,510 and $24,855, respectively, for the purchase of two vehicles. Monthly principal and interest payments are $599 and $450, respectively. The notes bear interest at 9.49% and 9.13% per annum and mature on February 13, 2019 and September 7, 2020, respectively. The notes are each secured by a vehicle.

 

H)	Promissory Note

 

On December 1, 2014 as part of the merger with Richfield, the Company assumed a promissory note in the amount of $578,454. The note bears interest at 10% per annum with monthly principal and interest payments in the amount of $15,000. The note matures on June 30, 2015, and is currently in default. As of June 30, 2015, the balance on the note had been reduced to $654,722 through principal payments of $13,732.

 

I)	Promissory Note

 

On April 1, 2015, the Company issued a promissory note with principal of $300,000 for proceeds of $300,000. The note bears interest at 12% per annum and is due and matures on July 15, 2015. On April 21, 2015, the Company paid $150,000 of the principal balance and On June 8, 2015, the Company paid $50,000 of the principal balance, leaving an ending balance of $100,000 at June 30, 2015.

 

Notes payable as of June 30, 2015 is as follows:

 

		June 30, 2015
Notes payable		$	2,109,343
Discount on notes			(218,541	)
Notes payable, net of debt discount			1,890,802
Less: Current maturities			(673,795	)
Notes payable, net of debt discount and current maturities		$	1,217,007

  

Future minimum debt repayments under these obligations at June 30, 2015 are as follows:

 

2015 (remainder of year)		$	669,005
2016			1,009,506
2017			410,116
2018			11,103
2019 and thereafter			9,613
		$	2,109,343

 

  

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 9 Convertible Notes Payable:

 

(A)	Series A Senior Secured Convertible Promissory Notes

 

From February 11, 2014 through April 10, 2014, the Company raised gross proceeds of $9,987,650 through the sale of units (the “Series A Units”) in a private offering (the “Series A Offering”). The purchase price for each Series A Unit was $50,000 and each Series A Unit consisted of (i) a 12% Series A Senior Secured Convertible Promissory Note in the principal amount of $50,000 (the “Series A Notes”) convertible into shares of common stock of the Company at a conversion price of $0.30 per share and (ii) a Series A warrant to purchase 33,333 shares of common stock of the Company at an exercise price of $0.30 per share (the “Series A Warrant”). All outstanding principal and interest of each Series A Note is due on February 11, 2016. The Series A Notes may be redeemed by the Company at any time following six (6) months after their respective issuance. If however, the Company elects to redeem the Series A Notes prior to the one (1) year anniversary date of the issuance of such Series A Note, the Company shall pay the holder all unpaid interest on the portion of the principal redeemed that would have been earned through such one (1) year anniversary date. Each Series A Note bears interest at 12% per annum and is due and payable quarterly, in arrears. The holder of each Series A Note may elect to convert the principal balance of the Series A Note into shares of common stock at any time following six (6) months after the issuance of such note. The Series A Notes are secured by a first lien on substantially all of the assets of the Company, including all present and future wells and working interests, on a pro-rata basis. As of June 30, 2015 the Company had not redeemed any Series A Notes and there were no conversions of the principal balance by note holders.

 

Beneficial Conversion Feature

 

The intrinsic value of certain convertible notes, when issued, gave rise to a beneficial conversion feature which was recorded as a discount to the notes of $1,613,642 to be amortized over the period from issuance to the date that the debt matures.

 

Warrants

 

Each investor participating in the Series A Offering received a Series A Warrant, exercisable for up to 33,333 shares of common stock for every $50,000 invested. The Series A Warrants are exercisable at $0.30 per share. The Series A Warrants expire five (5) years from the date of issuance. During the year ended December 31, 2014, and the period ended June 30, 2015, we issued Series A Warrants exercisable for up to 6,658,374 shares of our common stock to investors participating in the Series A Offering. The issuance of the Series A Warrants was recorded as a debt discount of $1,424,236 and is being amortized over the life of the Series A Note.

 

(B)	Series B Senior Secured Convertible Promissory Notes

 

From June 6, 2014 through August 20, 2014, the Company raised gross proceeds of $8,014,560 through the sale of units (the “Series B Units”) in a private offering (the “Series B Offering”). The purchase price for each Series B Unit was $50,000 and each Series B Unit consisted of (i) a 12% Series B Senior Secured Convertible Promissory Note in the principal amount of $50,000 (the “Series B Notes”) convertible into shares of common stock of the Company at a conversion price of $0.30 per share and (ii) a Series B warrant to purchase 33,333 shares of common stock of the Company at an exercise price of $0.30 per share (the “Series B Warrant”). All outstanding principal and interest of each Series B Note is due on June 6, 2016. The Series B Notes may be redeemed by the Company at any time following six (6) months after their respective issuance. If however, the Company elects to redeem the Series B Notes prior to the one (1) year anniversary date of the issuance of such Series B Note, the Company shall pay the holder all unpaid interest on the portion of the principal redeemed that would have been earned through such one (1) year anniversary date. Each Series B Note bears interest at 12% per annum and is due and payable quarterly, in arrears. The holder of each Series B Note may elect to convert the principal balance of the Series B Note into shares of common stock at any time following six (6) months after the issuance of such note. The Series B Notes are secured by a first lien on substantially all of the assets of the Company, including all present and future wells and working interests, on a pro-rata basis. The lien is pari-passu with the lien granted in favor of the holders of the Company’s outstanding Series A Notes. As of June 30, 2015 the Company had not redeemed any Series B Notes and there were no conversions of the principal balance by note holders.

 

Warrants

 

Each investor participating in the Series B Offering received a Series B Warrant, exercisable for up to 33,333 shares of common stock for every $50,000 invested. The Series B Warrants are exercisable at $0.30 per share. The Series B Warrants expire five (5) years from the date of issuance. During the year ended December 31, 2014, we issued Series B Warrants exercisable for up to 5,342,742 of our common stock to investors participating in the Series B Offering. The issuance of the Series B Warrants was recorded as a debt discount of $990,408 and is being amortized over the life of the Series B Note.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

  

(C)	Other Convertible Promissory Notes

 

As part of the merger with Richfield, on December 1, 2014, the Company agreed to assume two (2) convertible notes.

 

The first note was initially issued on September 5, 2013, the Company raised gross proceeds of $1,310,000 through issuance of a secured convertible promissory note to a single investor. The Note was increased to $3,194,972 as of May 1, 2014. The interest rate on 12% per annum due on or before June 30, 2016. The holder of Note may elect to convert the principal balance of the Note into shares of common stock at any time at a conversion price of $0.25 per share. The Note is secured by a first lien on substantially all of the assets of Richfield Oil & Gas Company, including all present and future wells and working interests, on a pro-rata basis. This Note is subject to a pari passu Intercreditor Agreement between the Series A and Series B Note Holders which was joined by the Wendell Y. M. Lew Revocable Living Trust on July 10, 2014.

 

Warrants

 

The Wendell Y. M. Lew Revocable Living Trust was issued Warrants, exercisable for up to 3,600,000 shares of common stock. The exercise price is $0.25 per share. The Warrants expire May 1, 2017. The issuance of the Warrants was recorded as a debt discount of $545,466 and were expensed at the time of issuance.

 

The second note was initially issued on May 15, 2014, the Company raised gross proceeds of $352,685 through issuance of a secured convertible promissory note to a single investor. The interest rate on 12% per annum due on or before May 31, 2015. The holder of Note may elect to convert the principal balance of the Note into shares of common stock at any time at a conversion price of $0.25 per share. The Note is secured by a first lien on substantially all of the assets of Richfield Oil & Gas Company, including all present and future wells and working interests, on a pro-rata basis. This Note is subject to a pari passu Intercreditor Agreement between the Series A and Series B Note Holders which was joined by the Wendell Y. M. Lew Revocable Living Trust on July 10, 2014. On June, 2014, the Company issued 218,000 shares to convert $54,000 of the principal balance, and On November 16, 2014, the Company issued 800,000 shares to convert $160,000 of the principal balance, leaving an ending balance including accrued interest of $138,182 at May 31, 2015.

 

On June 1, 2015 the note was extended under the same terms until July 31, 2015. The conversion rate into share of common stock was reduced from $0.25 per share to $0.10 per share and 250,000 warrants with an exercise price of $0.10 were issued. The transaction was accounted for under ASC 470-50-40 Extinguishment Accounting and generating a loss on extinguishment of debt of $1,758 for the three months ended June 30, 2015.

  

The following is a summary of Convertible Notes Payable:

 

		June 30, 2015
Convertible notes payable		$	21,328,098
Debt discount			(1,485,304	)
Convertible notes payable, net of debt discount			19,842,794
Less current maturities			(19,842,794	)
Long-term convertible notes payable, net		$	-

 

Future minimum debt repayments under these obligations at June 30, 2015 are as follows:

 

2015 (remainder of year)		$	130,916
2016			21,197,182
2017 and thereafter			-
		$	21,328,098

 

D)	Debt Issuance Costs

 

Debt issuance costs, net are as follows:

 

Balance - January 1, 2014		$	-
Debt issuance costs incurred in 2014			2,853,541
Amortization of debt issuance costs			(958,163	)
Balance – December 31, 2014		$	1,887,378
Debt issuance costs incurred in 2015			8,000
Amortization of debt issuance costs			(737,727	)
Balance - June , 2015		$	1,157,651

  

  

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 10 Stockholders’ Equity (Deficit):

 

(A)	Preferred Stock

 

During the six months ended June 30, 2015 the Company did not issue any shares of preferred stock.

 

(B)	Common Stock

 

During the six months ended June 30, 2015, the Company issued the following common stock:

 

Transaction Type		Quantity of Shares				Valuation				Range of Value per Share
Common stock issued for services			400,000			$	54,000			$	0.135
Common stock issued to settle liabilities			2,100,000				283,500			$	0.135
Common Stock issued to settle lawsuit and abandon lease			1,333,333			$	133,333			$	0.10
Common stock issued for exercise of warrants			350,000			$	31,500			$	0.35
Common stock cancelled			(1,782,266	)			(17,823	)		$	0.01
Total			2,401,067			$	484,510			$	0.01-0.35

  

(C)

Warrants

 

The following is a summary of the Company’s warrant activity during the six months ended June 30, 2015:

 

		Warrants				Weighted Average Exercise Price
Outstanding – January 1, 2015			33,450,677			$	0.34
Exercisable – January 1, 2015			33,450,677			$	0.34
Granted			250,000			$	0.10
Exercised			525,000			$	0.35
Expired/Cancelled			(1,593,061	)		$	1.65
Outstanding – June 30, 2015			31,582,606			$	0.27
Exercisable – June 30, 2015			31,582,606			$	0.27

  

Warrants Outstanding																Warrants Exercisable
Range of exercise price						Number Outstanding				Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price				Number Exercisable		Weighted Average Exercise Price
$			0.10 - $5.00				31,582,606			3.17 years		$	0.27			31,582,606		$	0.27

 

At June 30, 2015 and 2014 there was no intrinsic value of warrants outstanding and exercisable.

 

(D)

Options

 

The following is a summary of the Company’s option activity during the six months ended June 30, 2015:

 

		Options				Weighted Average Exercise Price
Outstanding – January 1, 2015			17,850,000			$	0.21
Exercisable – January 1, 2015			15,225,000			$	0.19
Granted			4,000,000			$	0.15
Exercised			-			$	-
Forfeited/Cancelled			(9,800,000	)		$	0.23
Outstanding – June 30, 2015			12,050,000			$	0.17
Exercisable – June 30, 2015			10,800,000			$	0.15

 

  

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Options Outstanding														Options Exercisable
Range of exercise price				Number Outstanding				Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price				Number Exercisable				Weighted Average Exercise Price
$	0.08-$0.30				12,050,000			5.63 years		$	0.17				10,800,000			$	0.15

 

At June 30, 2015 and 2014 there was no intrinsic value of options outstanding and exercisable.

 

(E)	Treasury Stock

 

There were no treasury stock transactions during the six months ended June 30, 2015.

 

Note 11 Commitments and Contingencies:

 

Litigations, Claims and Assessments

  

On December 10, 2013, the Company entered into a Joint Development Agreement dated as of December 3, 2013 (the “Joint Agreement”) with Eagleford Energy, Inc., an Ontario, Canada Corporation (“Eagleford”) and its wholly-owned subsidiary, Eagleford Energy, Zavala Inc., a Nevada corporation (“Eagleford Zavala”). On January 24, 2014, the Company, Eagleford and Eagleford Zavala entered into an amendment to the Joint Agreement (the “First Amendment”), pursuant to which Eagleford Zavala, in exchange for certain commitments made by us therein, accelerated the grant to us of certain undivided interests in its oil and gas lease dated September 1, 2013 covering approximately 2,629 acres in Zavala County, Texas (the “Lease”). Effective March 31, 2015 the Company settled litigation against Eagleford Energy, Zavala Inc. The action was for foreclosure of the payment of obligations owed by Eagleford Energy, Zavala Inc. for lease obligations. Prior to foreclosure Eagleford paid the obligations which were owed. On March 31, 2015 this matter was settled by Stratex releasing its interest in the project for the development of the 2,926 acres in Zavala County, Texas, to its two partners Eagleford Energy, Zavala Inc. and Quadrant Energy, Inc. The parties entered into a mutual release of all obligations. Pursuant to the Mutual Settlement Agreement and the abandonment of the lease the Company agreed to pay $25,000 in cash and issue 1,333,333 shares of common stock to Eagleford Energy Corp.

 

In or about June 2013 Baker Hughes filed an action for services rendered to Hewitt Operating Inc. captioned Baker Hughes Oilfield Operations, Inc. v Hewitt Operating Inc. Case number 01-14-0000-1596. In 2014 Baker Hughes and Hewitt Operating Inc. reached a settlement whereby Hewitt Operating Inc made monthly payments to Baker Hughes to retire the obligation. In April 2015 Hewitt Operating Inc. paid the last payment to Baker Hughes. In June 2015 Baker Hughes claimed that an additional sum of approximately $26,500 was due. Pursuant to the settlement agreement Baker Hughes has requested that the matter be arbitrated. An initial hearing for arbitration is scheduled for August 12, 2015.

 

In 2013 an individual Aaron Kilgariff performed services for Richfield Oil & Gas Company in the State of Kansas. In 2014 Mr. Kilgariff filed an action in the District Court of Sumner County, Kansas case number 2014-CV-71 captioned AKK, LLC v Hewitt Energy Group, LLC for compensation of services, Richfield Oil & Gas Company filed a counterclaim for damages for work that was not properly performed. The amount which is being sought is approximately $36,000.

 

On June 19, 2015 Itasca Energy LLC filed an action for a Temporary Restraining Order in the District Court of Harris County, Texas Judicial District 234, against Stratex Oil and Gas Holdings, Inc. and First Rock I, LLC. This matter arises over a dispute between the parties regarding the terms of a Joint Development Agreement entered between the parties in March 2015. The Temporary Restraining Order was denied. On July 24, 2015 Itasca Energy LLC renewed its request for a Temporary Restraining Order again in the Harris County, Texas District Court Judicial District 234. This second request was also denied. The parties have requested that this matter be set for Mediation as provided for within the Joint Development Agreement. Stratex contends that Itasca has breached the Joint Development Agreement by failing to provide the information required and that Itasca has not earned the right to proceed with the drilling of additional wells under the term of the Joint Development Agreement. Arbitration is to be scheduled.

 

On July 7, 2015 the State of Illinois has set a hearing for Stratex Oil and Gas Holdings, Inc. formerly Richfield Oil & Gas Company to appear at the Secretary of State Office, Securities Department. Case number C1300334. The hearing concerns the selling of common stock in June 2012. The Company contends that all representations were accurate at the time of the Sale of the Common Stock. The Company will defend this matter at the hearing.

 

  

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Litigation in the Ordinary Course

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that they believe will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.

 

Oil & Gas Prices

 

The prices of oil, natural gas, methane gas and other fuels have been, and are likely to continue to be, volatile and subject to wide fluctuations in response to numerous factors, including but not limited to the worldwide and domestic supplies of oil and gas, changes in the supply of and demand for such fuels, political conditions in fuel-producing and fuel-consuming regions, weather conditions, the development of other energy sources, and the effect of government regulation on the production, transportation and sale of fuels. These factors and the volatility of energy markets make it extremely difficult to predict future oil and gas price movements with any certainty. A decline in prices could adversely affect the Company’s financial position, financial results, cash flows, access to capital and ability to grow.

 

Environmental Liabilities

 

Oil and gas operations are subject to many risks, including well blowouts, cratering and explosions, pipe failure, fires, formations with abnormal pressures, uncontrollable flows of oil, natural gas, brine or other well fluids, and other environmental hazards and risks. Our drilling operations involve risks from high pressures and from mechanical difficulties such as stuck pipes, collapsed casings, and separated cables. If any of these circumstances occur, the Company could sustain substantial losses as a result of injury or loss of life, destruction of property and equipment, damage to natural resources, pollution or other environmental damages, clean-up responsibilities, regulatory investigations and penalties, suspension of operations, and compliance with environmental laws and regulations relating to air emissions, waste disposal and hydraulic fracturing, restrictions on drilling and completion operations and other laws and regulations. The Company’s potential liability for environmental hazards may include those created by the previous owners of properties purchased or leased prior to the date we purchase or lease the property. The Company maintains insurance against some, but not all, of the risks described above. Insurance coverage may not be adequate to cover casualty losses or liabilities.

 

Employment Contracts

 

On January 15, 2015, and effective as of January 1, 2015, the Company entered into Amended Employment Agreements with the following Executive Officers: Alan D. Gaines, Executive Chairman of the Board; Stephen P. Funk, Chief Executive Officer: Matthew S. Cohen, Executive Vice President and General Counsel; Michael J. Thurz, Chief Administrative Officer; and Michael A. Cederstrom, Vice President. The purpose of the Amended Employment Agreements was to assist with the Company’s cash flow during this period of reduced oil and gas commodity pricing. The amendments to the Employment Agreements removed the provision stating the amount of salary to be paid and replaced it with the following statement, “…salary at the rate to be determined by the Board of Directors. Executive’s base salary may be reviewed and further adjusted from time to time by the Board in its discretion”. Pursuant to this amendment the Board of Directors reduced the Executive Officers base salary by 75%.

 

On February 13, 2015 the Board of Directors accepted the resignation of Matthew S. Cohen as the Company’s General Counsel and Executive Vice President to allow him to pursue other business opportunities.

 

On April 28, 2015 the Board of Directors of the Company, accepted the resignation of Alan D. Gaines, our Executive Chairman of the Board and Board Member. Mr. Gaines resigned in order to pursue other business opportunities. The Company and Mr. Gaines signed a Separation Agreement whereby Mr. Gaines agreed to return 1,782,266 shares of the Company’s common stock and 6,300,000 warrants vested or unvested owned by Mr. Gaines are cancelled.

 

 

Stratex Oil & Gas Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Agreements with Placement Agents and Finders

 

The Company entered into a Financial Advisory and Investment Banking Agreement with Radnor Research & Trading Company, LLC (“Radnor”) effective January 24, 2014 (the “Radnor Advisory Agreement”). Pursuant to the Radnor Advisory Agreement, Radnor acted as the Company’s exclusive financial advisor and placement agent to assist the Company in connection with the two private placements of the Series A and Series B Convertible Promissory Notes.

 

There were no payments to Radnor during the six months ended June 30, 2015. During the six months ended June 30, 2014 the Company paid to Radnor fees of $658,551 and issued to Radnor 2,195,187 warrants to purchase common stock that expire five (5) years from the date of issuance with an exercise price of $0.30 per share.

 

The Company entered into a Financial Advisory and Investment Banking Agreement with Radnor Research & Trading Company, LLC (“Radnor”) effective May 29, 2015 (the “Radnor Finder’s Fee Agreement”). Pursuant to the Radnor Finder’s Fee Agreement, Radnor acted as the Company’s financial advisor and placement agent to assist the Company in connection with the referral of one or more Counterparties involving the Company engaging in certain transactions.

 

During the six months ended June 30, 2015 the Company paid to Radnor fees of $85,000 related to these transactions under the Finder’s Fee Agreement. There were no payments to Radnor during the six months ended June 30, 2014.

 

Joint Development Agreements

 

On March 13, 2015 the Company entered into a Joint Development Agreement with Itasca Energy LLC (“IE”) whereby IE will drill up to 6 wells in the Buda Limestone formation of the leasehold to earn a 77.5 % working interest in each of the 6 wells which are completed, the Company will retain a 21.3% working interest in each well. IE will pay all cost of development through the tanks on the six wells. If IE completes all six wells they will earn a 77.5 % working interest in 10,314 gross (7,994 net) working interest in the Matthews Lease and 50% working interest in 9,333 gross and (4,666 net) in the remaining portion of the Matthews Lease. The first well of this agreement was spudded on March 16, 2015 each of the 5 remaining wells must be spudded within 120 days of the prior well reaching total depth. If the wells are not spudded with the required time period then IE will earn its interest in the actual wells drilled only and will not earn an interest in the total lease.

 

On March 31, 2015, the Company entered into a Commercial Term Sheet with Eureka Petroleum Corp. (‘Eureka”) to sell to Eureka an undivided 50% of the Company’s retained BWI under the JDA with IT discussed above, increasing to an undivided 75% of the Company’s retained BWI in the two Excluded Wells. The agreed purchase price is $3,300,000, together with a carry of the Company’s share of all costs for completion of the two Excluded Wells. Eureka has paid a $500,000 non-refundable deposit to the Company, together with $25,000 of costs for the initial re-entry and preliminary testing of the Excluded Wells. An additional non-refundable deposit of $600,000 is was received on July 2, 2015, with the remaining $2,200,000 of the purchase price scheduled to be paid during July, 2015. Completion operations are scheduled to commence in July, 2015, on the first of the two Excluded Wells, known as the BPH Matthews #1H Well, which was previously drilled to the Pearsall formation. Completion operations on the second Wells, known as the Matthew #2501, which was previously drilled to the San Miguel formation, are scheduled to commence in during 2015

  

Note 12 Subsequent Events:

 

On June 19, 2015 Itasca Energy LLC filed an action for a Temporary Restraining Order in the District Court of Harris County, Texas Judicial District 234, against Stratex Oil and Gas Holdings, Inc. and First Rock I, LLC. This matter arises over a dispute between the parties regarding the terms of a Joint Development Agreement entered between the parties in March 2015. The Temporary Restraining Order was denied. On July 24, 2015, Itasca Energy LLC renewed its request for a Temporary Restraining Order again in the Harris County, Texas District Court Judicial District 234. This second request was also denied. The parties have requested that this matter be set for Mediation as provided for within the Joint Development Agreement. Stratex contends that Itasca has breached the Joint Development Agreement by failing to provide the information required and that Itasca has not earned the fight to proceed with the drilling of additional wells under the term of the Joint Development Agreement. Arbitration is to be scheduled.

 

On June 23, 2012 the Company was notified that the SEC had questions regarding its Form 10-K for the Fiscal Year Ended December 31, 2014. On July15, 2015 the Company responded to the questions contained in the letter and filed an Amended 10 K/A for the period ending December 31, 12015 and an Amended Engineering Report for the period ending December 31, 2015 on July 17, 2015.

 

On July 7, 2015 the State of Illinois sent a Notice of Hearing for Stratex Oil and Gas Holdings, Inc. formerly Richfield Oil & Gas Company, to appear at the Secretary of State Office Securities Department, on September 16, 2015. This matter is identified as Case number C1300334. The hearing relates to the selling of common stock in June 2012. The security Department contends that the Company represented that the Company represented that the oil production was 100 bbls per day and that the actual production was 28 barrels per day. The Company contends that all representations were accurate at the time of the Sale of the Common Stock.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements appearing in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties because they are based on current expectations and relate to future events and future financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth in our “Risk Factors.”

 

Overview

 

We are an independent energy company focused on the acquisition and subsequent exploitation and development of predominantly crude oil in Kansas and Texas as well as varied non-operated working interests in North Dakota, Montana, Colorado, Utah and Kansas. In Texas, we have interests in certain properties located in Zavala Counties. Our Zavala County acreage lies within the established oil rim of the very prolific Eagle Ford Shale play, one of the most actively drilled basins in the United States. The play is also known for multiple stacked pay zones and is also highly prospective for the San Miguel, Austin Chalk and Buda formations, which all produce within the general vicinity. Management views our Zavala County acreage as the cornerstone of its present development program. Our Kansas property is situated on acreage where we intend to drill low risk, wells in the Wilcox and Arbuckle formations located in central Kansas area. In Montana, we focus on stacked Williston Basin production primarily from the Bakken Shale, and Three Forks formations. Our Utah property is located in the Central Utah overthrust and the shale play. We are currently participating in the shale play with Whiting Petroleum as the operator.

 

Present corporate strategy is to internally identify those prospects, which may take the form of acquisition of bolt on acreage and/or production within existing core areas or other potentially opportunistic areas of interest. We intend to evaluate those prospects utilizing subsurface geology, geophysical data and existing well control. Currently, we utilize the services of geologists, petroleum engineers and geophysicists with local expertise on a contract basis, in order to maintain a low cost structure.

 

To date, the Company has only held small, passive, non-operated working interests in North Dakota, Montana and Kansas. By virtue of our recent Richfield Merger with Richfield the Company now intends to actively exploit Kansas and Utah properties together with the Zavala County Texas properties. The Company has assumed operator status. Upon assuming the role of operator, subject to the terms of the underlying leases, the Company will be able to have greater control over the timing of expenditures, drilling and completion costs, and operating budgets.

 

The Company currently owns, as of June 30, 2015, an interest in 60 wells, 47 of which account for the Company’s present net production and cash flow. Currently, we hold approximately 32,885 net leasehold acres in Roosevelt and Sheridan Counties, Montana, Williams, Billings, Divide, Mountrail, Golden Valley and Stark Counties, North Dakota, Weld County, Colorado, Stafford, Sumner, Ford, and Lane Counties, Kansas, Rich, Juab and Sanpete Counties, Utah, Uintah County, Wyoming, and Zavala County, Texas.

 

The Bakken formation is recognized internationally as a major source of oil reserves. The United States Geological Survey (USGS) estimates that the Bakken has some 4.3 billion barrels of recoverable oil. The Keystone pipeline, which runs along the US-Canada border, was halted by President Obama and we expect it to be approved and construction to be resumed in the near future. If approved, it will be a principal means of transporting the Bakken oil from the Canadian and US portions of the formation to the refineries. It is believed that the Bakken oil fields and the shale gas fields in other parts of the US will make the US energy independent this decade.

 

We expect to continue to acquire oil and gas properties and to build our asset base. As we continue to review business opportunities, we believe that we will need to raise additional capital through equity sales and debt financing to continue to acquire more properties, and business opportunities, such properties are expected to generate cash flow from participation in the development of the drilling programs that each property is designed to support.

 

  

Results of Operations for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014:

 

Revenues:

 

We generated revenues of $284,694 for the three months ended June 30, 2015 compared to $320,693 for the three months ended June 30, 2014. This decrease in revenues of $36,000 or 11% was caused by precipitous decrease in oil prices from the prior year. This was offset by a sales volume increase as a result of the merger of the Company with Richfield on December 1, 2014.

 

Operating Expenses:

 

●	Production expense was $206,560 for the three months ended June 30, 2015 compared to $140,791 for the three months ended June 30, 2014. The increase in expenses of $65,769 or 47% reflects an increase in the number of producing wells as a result of one of the merger of the Company with Richfield on December 1, 2014.
●	General and administrative expense was $1,048,559 for the three months ended June 30, 2015 compared to $2,887,788 for the three months ended June 30, 2014. The overall $1,839,229 decrease in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

	●	A decrease in legal, accounting and professional fees of $469,919 or 67%. In the prior year the Company incurred higher legal and consulting fees due to the Company negotiating and entering into multiple Joint Development Agreements, the commencement of the Company’s private offering and merger with Richfield.
	●	An increase in Insurance expenses of $31,184 or 999% as a result of the Company’s merger with Richfield.
	●	An decrease in Travel and travel related expenses of $28,944 or 31% as a result of the completion of the Company’s merger with Richfield and the reduced need for travel.
	●	An increase in Rent expenses of $32,842 or 868% as a result of the Company’s additional lease requirements as part of the merger with Richfield.
	●	An increase of payroll and payroll related expenses of $54,681 or 29% that was attributed to an increase in FTE as a result to merger of the Company with Richfield on December 1, 2014.
	●	A decrease in Stock based compensation of $1,334,120 as a result of the Company’s FTE as a result to merger of the Company with Richfield on December 1, 2014.  This was slightly offset by additional amortization of employee option agreements and additional stock awards from the previous year.
	●	A decrease in all other general and administrative expenses in the amount of $24,954 or 15%.
●	Depletion, depreciation and amortization expense was $112,861 for the three months ended June 30, 2015 compared to $24,188 for the three months ended June 30, 2014. The increase in expense reflects an increase in total oil production as a result of the merger of the Company with Richfield on December 1, 2014 coupled with an increase in the per barrel depletion rates as a result of the Company reserve reports as compared to the three months ended June 30, 2014.
●	Impairment of oil and gas assets was $0 for the three months ended June 30, 2015, and $0 for the three months ended June 30, 2014.

 

●	Loss on abandonment of oil and gas assets was $0 for the three months ended June 30, 2015, and $318,800 for the three months ended June 30, 2014. The prior year abandonment was recognized to reflect the Company’s termination of its Callahan County Joint Development Agreement

 

Other Income and (Expense):

 

Other Income (Expense)-net: Other income (expenses) consists primarily of gains and losses on the change in fair value of derivative liabilities, gains and losses on sale of oil and gas properties/interests and interest expense all primarily related to the Company’s convertible promissory notes, traditional notes and warrant issuances.

 

Other income (expenses) - net decreased by $5,738,878 to ($7,391,452) for the three months ended June 30, 2015 as compared to other income (expenses) - net of $(1,652,574) for the three months ended June 30, 2014. For the three months ended June 30, 2015 other income (expenses) consisted of ($1,664,562) in interest expense, a gain on change in fair value of derivative liabilities of $5,058, and a loss on sale of gas and oil properties of ($5,730,240) and loss on extinguishment of debt of ($1,708). For the three months ended June 30, 2014 other income (expenses) consisted of ($1,762,649) in interest expense, a gain on change in fair value of derivative liabilities of $17,322, a gain on sale of oil and gas interests of $0, a gain on settlement of liabilities of $84,600, and other income of $82.

 

 

Results of Operations for the Six months ended June 30, 2015 as compared to the Six months ended June 30, 2014:

 

Revenues:

 

We generated revenues of $594,422 for the six months ended June 30, 2015 compared to $419,050 for the six months ended June 30, 2014. This increase in revenues of $175,372 or 42% The increase in expenses reflects an increase in the number of producing wells as a result of one of the merger of the Company with Richfield on December 1, 2014 and was offset by the precipitous drop in oil prices.

 

Operating Expenses:

 

●	Production expense was $518,087 for the six months ended June 30, 2015 compared to $181,730 for the six months ended June 30, 2014. The increase in expenses of $336,357 or 185% reflects an increase in the number of producing wells as a result of one of the merger of the Company with Richfield on December 1, 2014.
●	General and administrative expense was $1,727,987 for the six months ended June 30, 2015 compared to $3,666,396 for the six months ended June 30, 2014. The overall $1,938,409 decrease in general and administrative expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

	●	A decrease in legal, accounting and professional fees of $850,000 or 69%. In the prior year the Company incurred higher legal and consulting fees due to the Company negotiating and entering into multiple Joint Development Agreements, the commencement of the Company’s private offering and merger with Richfield.
	●	An increase in Insurance expenses of $57,277 or 363% as a result of the Company’s merger with Richfield.
	●	A decrease in Travel and travel related expenses of $32,625 or 22% as a result of the completion of the Company’s merger with Richfield and the reduced need for travel.
	●	An increase in Rent expenses of $74,472 or 760% as a result of the Company’s additional lease requirements as part of the merger with Richfield.
	●	An increase of payroll and payroll related expenses of $192,127 or 64% that was attributed to an increase in FTE as a result to merger of the Company with Richfield on December 1, 2014.
	●	A decrease in Stock based compensation of $1,289,968 or 72% as a result of the Company’s FTE as a result to merger of the Company with Richfield on December 1, 2014.  This was slightly offset by additional amortization of employee option agreements and additional stock awards from the previous year.
	●	A decrease in all other general and administrative expenses in the amount of $104,687 or 56%.
●	Depletion, depreciation and amortization expense was $291,519 for the six months ended June 30, 2015 compared to $41,707 for the six months ended June 30, 2014. The increase in expense reflects an increase in total oil production as a result of the merger of the Company with Richfield on December 1, 2014 coupled with an increase in the per barrel depletion rates as a result of the Company reserve reports as compared to the six months ended June 30, 2014.
●	Impairment of oil and gas assets was $705,330 for the six months ended June 30, 2015, and $0 for the six months ended June 30, 2014.

 

●	Loss on abandonment of oil and gas assets was $331,405 for the six months ended June 30, 2015, and $318,800 for the six months ended June 30, 2014.

 

Other Income and (Expense):

 

Other Income (Expense)-net: Other income (expenses) consists primarily of gains and losses on the change in fair value of derivative liabilities, gains and losses on sale of oil and gas properties/interests and interest expense all primarily related to the Company’s convertible promissory notes, traditional notes and warrant issuances.

 

Other income (expenses) - net decreased by $7,427,194 to ($9,020,790) for the six months ended June 30, 2015 as compared to other income (expenses) - net of $(1,593,596) for the six months ended June 30, 2014. For the six months ended June 30, 2015 other income (expenses) consisted of ($3,305,068) in interest expense, a gain on change in fair value of derivative liabilities of $108,303, a loss on sale of gas and oil properties of ($5,730,240), a loss on settlement of liabilities of ($92,077) and loss on extinguishment of debt of ($1,708). For the six months ended June 30, 2014 other income (expenses) consisted of ($2,087,675) in interest expense, a gain on change in fair value of derivative liabilities of ($72,094) Warrant amendment expense of ($14,755), a gain on sale of oil and gas interests of $450,000, a gain on settlement of liabilities of $83,600, and other income of $39,257.

 

 

Liquidity and Capital Resources:

 

We have incurred net operating losses and operating cash flow deficits since inception, continuing through the second quarter of 2015. We are in the early stages of acquisition and development of oil and gas leaseholds and properties, and we have been funded primarily by a combination of equity issuances and debt, and to a lesser extent by operating cash flows, to execute on our business plan of acquiring working interests in oil and gas properties and for working capital for production. At June 30, 2015, we had cash and cash equivalents totaling $104,104.

 

Our ability to obtain financing may be impaired by many factors outside of our control, including the capital markets (both generally and in the crude oil and natural gas industry in particular), our limited operating history, the location of our crude oil and natural gas properties and prices of crude oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and other factors. Further, if crude oil or natural gas prices on the commodities markets decline, our revenues will likely decrease and such decreased revenues may increase our requirements for capital.

 

Any new debt or equity financing arrangements may not be available to us, or may be available only on unfavorable terms. Additionally, these alternatives could be highly dilutive to our existing stockholders, and may not provide us with sufficient funds to meet our long-term capital requirements. We have and may continue to incur substantial costs in the future in connection with raising capital to fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and business plans, and we may be required to sell some or all of our properties (which could be on unfavorable terms), seek joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, cease our operations, sell or merge our business, or file a petition for bankruptcy.

  

Our condensed consolidated financial statements for the six months ended June 30, 2015 were prepared assuming we would continue as a going concern, which contemplates that we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that could result should we be unable to continue as a going concern.

 

Cash Flows from Operating Activities

 

Cash used in operating activities was $1,965,146 for the six months ended June 30, 2015, as compared to cash provided by operating activities of $1,654,405 during the six months ended June 30, 2014. The increase in cash provided by operating activities during the six months ended June 30, 2015 as compared to June 30, 2014 is primarily due to increases in rent, salaries, interest, and payroll related expenses.

 

Cash Flows from Investing Activities

 

Cash provided by investing activities for the six months ended June 30, 2015 was $19,426 as compared to cash used in investing activities of $4,873,028 during the six months ended June 30, 2014. The net decrease is primarily due to a significant decrease in capital acquisition spending during the period as compared to the same period in 2014.

 

 

Cash Flows from Financing Activities

 

Total cash provided by financing activities was $76,608 for the six months ended June 30, 2015 and was derived from the repayment of debt and subsequent proceeds from various notes payable and convertible debt, as compared to $12,250,280 during the six months ended June 30, 2014. Total net cash provided by financing activities during the six months ended June 30, 2014 was from various debt and equity offerings. For more details about these debt and equity financings, see Notes to the Condensed Consolidated Financial Statements.

 

Planned Capital Expenditures

 

Depending on our ability to obtain sufficient financing, development plans for 2015 include identifying, acquiring and operating properties as well continued development of our existing leases. The Company plans to continue its Joint Development Programs in Texas and to review opportunistic acquisitions when available. We will also to continue to participating in the ongoing Authorization for Expense (AFE) process for the existing properties where these programs make economic sense for the Company.

 

The Company incurred approximately $336,160 in development costs related to the purchase and development of working interest in wells during the six months ended June 30, 2015. Unrelated to any potential acquisitions or advances to be made to Richfield under the Loan Agreement, the Company expects to incur maintenance and operating costs of approximately $45,000 to $60,000 per month for the next twelve months to maintain these assets.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, we have elected not to provide the disclosures required by this item.

 

Item 4. Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Administrative Officer (“CAO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2015. The CEO and CAO have concluded that, as of June 30, 2015, our disclosure controls and procedures were not effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes made in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - Other Information

 

Item 1. Legal Proceedings

 

In or about September 2014 Stratex filed an action against Eagleford Energy, Zavala Inc. in the 293^rd District Court of Zavala County, Texas. Styled Stratex Oil & Gas Holdings, Inc. v Eagleford Energy, Zavala Inc. Case No 14-09-132090-ZCV, the action was for foreclosure of the payment of obligations owed by Eagleford Energy, Zavala Inc. for lease obligations. Prior to foreclosure Eagleford paid the obligations which were owed. On March 31, 2015 this matter was settled by Stratex releasing its interest in the project for the development of the 2,926 acres in Zavala County, Texas, to its two partners Eagleford Energy, Zavala Inc. and Quadrant Energy, Inc. The parties entered into a mutual release of all obligations.

 

Litigation in the Ordinary Course

 

We have become involved in litigation from time to time relating to claims arising in the ordinary course of our business. We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition and cash flows.

 

Item 1A. Risk Factors

 

As a smaller reporting company, we have elected not to provide the disclosures required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On March 31, 2015 the Company issued 2,500,000 shares of unregistered common stock to employees and consultants for work on the merger between the Company and Richfield. The shares were issued at $0.135 per share.

 

On March 31, 2015 the Company issued 1,333,333 shares of unregistered common stock to Eagleford Energy Corp in settlement of litigation between the Company and Eagleford Energy Corp. The shares were issued at $0.10 per share.

 

On April 28, 2015 the Company issued 350,000 shares of unregistered common stock for the exercise of warrants by a consultant of the Company. The shares were issued at $0.15 per share.

  

Item 6. Exhibits

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002. (Filed herewith)
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith)
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (Filed herewith)

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	STRATEX OIL & GAS HOLDINGS, INC.
Date: August 14, 2015	By:	/s/ Stephen Funk
		Stephen Funk
		Chief Executive Officer and Director
		(Principal Executive Officer)
Date: August 14, 2015	By:	/s/ Michael J. Thurz
		Michael J. Thurz
		Chief Administrative Officer
		(Principal Financial Officer)

 

 

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